Taxes Can Clobber Amazon's Sales, but That Doesn't Matter

Amazon loses up to 24% of sales when a state collects tax. But even that can't stop the online behemoth.

Those who didn't rail against Amazon.com (NASDAQ:AMZN) for its incredibly expensive P/E ratio always had another argument: What happens when Amazon.com finally starts collecting sales tax? Although this has been a main differentiator for years versus brick-and-mortar retailers, Amazon's tax-collecting agreements with various states are now coming into effect.

And the Amazon bears were right. Customers buy less from Amazon, significantly less, when taxes are included. Even so, it doesn't matter. Why? Because even if customers don't buy from Amazon, they buy through Amazon.

Tax implicationsA study (link opens PDF) from researchers at The Ohio State University of about 250,000 households, including those in states that began imposing a sales tax, found that Amazon sales declined 9.5% after a tax was introduced. Worse for Amazon, purchases above $300 fell almost 24%. As questions about Amazon Prime's sustainability swirl, like the cost of repeatedly shipping low-value items in two days, the effect of taxes reducing large spending could further hurt profitability of the service. Amazon raised the price of Prime to $99 from $79 in March.

And seemingly worrisome for Amazon, these lost sales go to others. After a tax was imposed, the study found, local brick-and-mortar retailers experienced a 2% increase in sales, and competing online retailers experienced a nearly 20% increase in sales.

But who are those other online retailers?While a 20% bump in competitors' sales seems scary for Amazon and its investors, a majority of those "competitors" sell through Amazon. In fact, Amazon Marketplace sales increased 15% after a tax was enacted. Sorting out whether this Marketplace growth would have occurred regardless is difficult, but it does mirror the rise in sales for other online competition. And it's important to note, Marketplace sellers do not collect sales tax, even though they may employ Amazon to fulfill the order.

The amount that Amazon charges sellers to use its platform varies greatly based on what item is sold, with fees usually between 8% and 15% of the sales price, though they can be as high as 25% for Kindle accessories. There is also a $40 monthly fee for a higher tier of Marketplace accounts, allowing sellers to avoid a $1-per-item fee and sell a wider range of goods.

And an even smaller worry in the futureAmazon has been the states' target for taxes as it is so high-profile. As legislation catches up to practice, governments will craft laws that apply equally to all businesses instead of negotiating with company after company. This means that even Marketplace sellers will have to collect tax, and once the tax laws are levied for all, this slight avoidance of Amazon purchases will be a short-term blip.

Such legislation, like the Marketplace Fairness Act of 2013, which would allow states to collect sales tax from out-of-state retailers and which Amazon supports, passed the Senate last May and now awaits the House's action.

While taxes present a short-term issue for Amazon, customers are simply buying through Amazon instead of from Amazon. And either way, Amazon makes money.